Guess what? Even if you refinance at the same mortgage rate, your payment drops $53 from $955 to $902. Only because you stretched the repayment of your current balance over a new 30-year term. This is referred to as “re-casting” or “re-amortizing” your loan. Do you need to refinance to accomplish this? Not necessarily. Many lenders offer this service to their borrowers for a fee of about $250.

NOTE: The lower payment comes at a price – because you take 33 years to repay your loan instead of 30, your total payments are $15,463 more over the life of the loan.

Extending your repayment

Taking this same idea a little further, you can lower your payment even more by refinancing to a longer mortgage term. You can find mortgages that amortize over 15 and 30 years, but also over five, ten, 25, 40 and 50 years. Refinancing the $188,997 balance at four percent over 40 years gets you a payment of $790, $165 a month less than the original $955. Again, you’re now stretching out your repayment over 43 years, and over the life of the loan it would cost you $69,783 more. A 50 year term at four percent (yes, they’re out there) drops your payment by $226 per month and costs you $128,020 more over the life of the loan.

There are many reasons you might need to reduce your mortgage payment, and lowering it with a longer term is not necessarily a bad thing – as long as you are not wrongly convinced that you are “saving” money.

Choosing an interest-only refinanceSome lenders don’t require you to begin paying off your mortgage balance right away – only that you pay your interest each month. These so-called interest-only (I/O) mortgages have two stages – an interest-only phase and an amortizing phase in which you pay off your balance. A four percent interest-only loan with a typical five-year interest-only phase gets you a payment of $630 – a whopping $325 less than your original payment!

HOWEVER, after the I/O phase, you have to begin repaying the loan – that means your balance must be repaid in only 25 years instead of 30, which increases your payment to $998 in year six. That’s not necessarily a bad thing as long as you have a plan for making that higher payment after the first five years.

Decreasing your mortgage rateTried and true -- refinancing to a lower mortgage rate is the only way to pay less each month and possibly less over the life of your home loan. Let’s go back to our three-year-old four percent mortgage and its $188,997 balance. We can use the Mortgage Checkup Tool to see which common refinance mortgages can reduce our monthly payment. Here is a sample of some actual results (which change frequently – yours may vary).

Any of these methods can reduce your monthly payment. You can even combine some of them – for instance refinancing to a lower rate and adding an interest-only option. A savvy loan officer can help you sort through the choices and choose the best one for your needs.